Joseph Reidy's Blog
We all know that buying a home is a significant decision that comes with a great deal of financial planning and preparation. However, few of us are taught the ins and outs of actually obtaining a mortgage to make your dream of homeownership come true.
Mortgages are a complicated business that is always changing, both with fluctuations in market rates and with policy decisions.
But, if you’re hoping to buy a home in the near future, it’s important to understand all of your options when it comes to mortgages.
In today’s post, we’re going to address the 20% down payment myth, where that number comes from, and what your options are when it comes to applying for a mortgage.
Where does the 20% down payment number come from?
For most people, 20% of a house is a serious amount of money that would take years to save up. If you’re a first-time homebuyer and don’t have any equity to use from selling another house, 20% may seem like an impossible amount to save within the time you want to buy a home. Fortunately, there are several ways to buy a home without having 20% in cash saved up.
But first, let’s understand where that number comes from.
Most mortgage lenders will want to ensure that lending to you is a safe investment of their money. They want to know that they’ll earn back what they’re spending. To do this, they use several methods.
First, they’ll check your credit history to see how often you pay your bills in time. Then, they’ll want proof if your income and financial stability. Finally, they’ll ask for either a down payment or a guarantee that you will pay them back. Here’s where that 20% comes in.
If you don’t have 20% of the mortgage amount saved for a down payment, you will typically have to pay something called private mortgage insurance. This is an extra monthly fee, on top of your mortgage payments with interest, that you pay to ensure the lender that they’re seeing a return on their investment.
Most homeowners put much less than 20% down
If you’re feeling bad about the amount of money you have saved for a down payment, don’t be! In fact, most first-time homebuyers put, on average, just 6% down on their first home.
Since first-time homeowners don’t have the benefit of equity they’ve accumulated by making payments on their previous mortgage, they often have to come up with down payments out of pocket.
Other options besides a 20% down payment
There are several ways to secure a mortgage without putting 20% down on the home. First, check to see if you are eligible for any loans that are guaranteed by the government. These can come from the Department of Veterans Affairs (VA), or the USDA single-family home program.
The third option is to take on private mortgage insurance until you’ve paid 20% of your mortgage payment.
Private mortgage insurance can be paid to an insurance company or to the federal government in the case of FHA loans, you can put down as low as 3.5%.
Between these three options, you should be able to find a mortgage that you can afford and one that will give you the best possible financial stability in the long-term.